state tax 'strategery'

'Strategery.' According to Wikipedia, the word "strategery" was coined for a Saturday Night Live sketch, written by James Downey, airing October 7, 2000, which satirized the performances of George W. Bush and Al Gore, two candidates for President of the United States, during the first presidential debate for election year 2000. Comedian Will Ferrell played Bush and used the word "strategery" (a mock-Bushism playing on the word "strategy"), when asked by a mock debate moderator to summarize "the best argument for his campaign", thus satirizing Bush's reputation for mispronouncing words. The episode was later released as part of a video tape titled Presidential Bash 2000.

After the 2000 presidential election, people inside the Bush White House reportedly began using the term as a joke, and it later grew to become a term of art among them meaning oversight of any activity by Bush's political consultants. Bush's strategists also came to be known within the White House as "The Department of Strategery" or the "Strategery Group.

I am in the middle of preparing for a presentation I will be giving next month in Chicago for Bloomberg BNA. As I was preparing for it, reading through recent developments, it dawned on me - we need new 'strategery' when dealing with state taxes. As taxpayers and tax professionals, we are constantly trying to find the right answer - what position to take, whether something is taxable, etc. We review explanations in tax research software, we read statutes, regulations, court cases. We call colleagues, and if we get really desperate, we call the state. I know, sometimes we call the state first, but we all know that when we call the state, we may not get the right answer. It depends on who we talk to, what department, etc. It can be very frustrating to find an answer that is reliable. 

Please note, I am not talking about tax avoidance or planning to minimize tax. I am simply talking about searching and looking for a compliant answer. We just want to know what position we are supposed to take. That's all. Should it really be that difficult to comply? 

What happens when we don't comply? We get notices. We get audits, and once we are in the middle of an audit, we get unreasonable audit requests for information. We get auditors taking positions that are in direct opposition to the state's statutes and regulations simply because the audit division has a 'policy' or 'procedure' to follow. 

Again, why is this so complicated? Do the states do it intentionally? Or is it simply a lack of resources, training? 

Regardless of the reason, we must find some new 'strategery' to navigate this playing field and reduce uncertainty.

As tax professionals, we can easily get in a rut of simply reading a tax research publisher's explanations or relying on an explanation from a 'big' accounting or law firm. I challenge you to read the cases for yourself. I promise, that if you do, you will find hidden gems of arguments and statements made by the court or the state that will give you clues as to what positions to take. I also challenge you to use other tools to be proactive, such as tax planning software.

Based on the complexity of compliance, we must play this game 'with a chip on our shoulder.' Let's not be passive and simply get tossed around.

Let's be game-changers, not just another player.

the game we love/hate; and a little test

Imagine playing a game against an opponent who also makes all of the rules. An opponent that constantly changes the rules as the game is in-progress. Now imagine there are 50+ opponents. 

That is the multistate tax profession. That is what multistate corporations deal with every day.

Let's work together to fight bad audit policies and procedures, the lack of independent tribunals, and the computerized notices that cause us to surrender. 

When we feel trapped in a box or against the wall, let's fight for direction, freedom and resolution.

knowledge test

Did you know that 7 states require corporations to file separate entity income tax returns?

Did you know that 10 states allow corporations to file separate entity income tax returns or to elect to file consolidated returns?

Did you know that 1 state requires corporations to file a nexus consolidated return?

Did you know that 14 states (plus DC) require corporations to file a combined return or allow taxpayers to elect to file a combined return?

Did you know that 12 states require corporations to file a combined return or allow taxpayers to elect to file a combined return or consolidated return?

TEST:

Can you categorize the states into the above categories?

Which states are not included in the above categories?

is ignorance bliss?

DIAGNOSIS

I recently went to the doctor. I hadn't been in a couple of years. With changing health insurance plans, I also had to change doctors which made it a little less convenient to go. While at the doctor, I had my blood drawn to test for different things, one of which was cholesterol. I got my test results and was shocked to learn my cholesterol was high. About ten years ago my cholesterol was high, I changed my diet and lowered it. Since then, admittedly, I have slowly not eaten as strict. However, I don't really eat that bad, relatively speaking. Meaning, I don't eat fried foods, I don't eat hamburgers, french fries, creamy, saucy food - or anything that tastes 'really' good, on a regular basis. In other words, I try to eat healthy. I am also an exercise addict. I lift weights and do some type of cardio about 4-6 times a week. I have been doing that since I was 13. So, again, when I heard my cholesterol was high, I was shocked.

NEW STRATEGY

Despite my diet being relatively good, I have eaten a lot of eggs (with yolks) and cheese over the past year or two. I love cheese (on just about everything). When I say I eat a lot of eggs, I mean several times a week. Thus, if there is one explanation for why my cholesterol is high, I am guessing that's it. So for now, I have cut out eggs and cheese. I have started eating oatmeal every day and have increased my cardio. I will get my blood rechecked in six months and learn if my new strategies worked.

Going through this, I jokingly said to my wife that if I never went to the doctor, I wouldn't have changed my behavior. I would not have known my cholesterol was high. I would have continued to eat eggs and cheese, no oatmeal. It's like when you take the car to the mechanic for a tune-up or oil change. We are all afraid the mechanic is going to find something serious and want us to fix it. We don't think there is anything wrong because the car has been operating completely fine.  

QUESTION

This begs the question - is ignorance bliss? Is it better to live not knowing what is really going on, as long as everything is operating fine? Or is it better to know and change behavior before you have a real problem?

STATE TAXES

This real life story parallels what companies do with state taxes. As long as nothing bad is happening (audit, notices, etc.) or the pain isn't too bad (annual liabilities), a company doesn't change its behavior or take a closer look.

EARLY DETECTION IS KEY

Just like with your health, being proactive about state taxes is a smart thing to do. Reviewing tax positions and returns prior to filing or prior to an audit is recommended. Resolving an audit controversy at the audit level or appeals level is better than going to court (in  most cases). Now, is better than later. 

Have you taken a closer look at your state tax returns and positions lately? Or is ignorance bliss?

that's the worst thing I've ever heard

We have tried to raise our daughters to have good morals and values, and we have tried to keep their exposure to 'bad movies' to a minimum. Consequently, we don't let our girls watch "R" movies or movies with sexual content or lots of bad language, if possible. However, my oldest daughter loves action movies, like the Bourne movies. Thus, sometimes, the limit gets pushed. I know they are exposed to these things through other kids at school, etc. We just try to be a positive influence and a place of refuge at home.

With that said, about a year ago on a rainy, cold weekend, my oldest daughter wanted to watch an action movie. So we looked through the movies we own, and found "Collateral." If you don't know what it is, it's a movie about a hit man (Tom Cruise) that comes to town for one night to kill several people. Jamie Foxx is the unfortunate taxi cab driver that drives Tom around town. In one part of the movie, Tom Cruise's character gets on the radio and puts on a 'tirade' to Jamie Foxx's boss, putting Jamie's boss in 'his place.' During the 'tirade,' Tom Cruise's character uses a lot of expletives and cuss words. Right after that, we paused the movie and my oldest daughter said, "that's the worst thing I've ever heard." My heart sank (and we laughed). We had been trying to keep our daughters from being exposed to bad language. We hadn't let them watch bad movies at other kid's houses, and here, at our own house - we expose them to the worst thing they have ever heard. We laugh about it today. (Note: we stopped watching the movie at that point)

What does this have to do with state taxes? Well, I'm sure you have heard auditors say some things that just don't make sense - that go blatantly against statutes, regulations and court rulings. I recently had an auditor take a position that was obviously against the state's law. I dug up the statutes and regulations and sent them to him. After a few days, he responded saying he sent them off to the legal department and the department said I was right. A few days later, he sent me revised assessments. As I opened the files, I was thinking I would see a better number for my taxpayer. To my surprise, I saw a worse number. Why? The auditor had corrected the issue I won, but subsequently, took a new position on another issue that raised the assessment. At first glance, I thought the new position was clearly wrong. I did some research and my instincts were correct. I called the auditor and we talked about the issue. During our call he said one of the worst things I've ever heard - "I know the law doesn't say it, but it should." He went on to say that rules weren't written to explain all of these issues and the department was taking a position on 'what should be there.' I got off the phone - a little shocked and to admit, a little pissed. The department was taking a position not supported by law and requiring my client to protest it. 

I know other tax professionals and taxpayers have their own horror stories that are very similar to what I just described. Why is this the case? Why do states take policy positions that are not supported by law? Why are taxpayers forced to fight or to surrender when the rules are clear?

I would love to hear your 'horror story.' Please feel free to comment on this post; or for confidentiality reasons, you can contact me directly. 

collaborating with Bloomberg BNA on new state tax analysis tool

Working in the state tax field for 20+ years, I have experienced companies using all kinds of excel spreadsheets for what-if planning, tax provision analysis, quarterly estimates, and tax audit response. Some have worked well, and others, not so much. If your company or your clients are looking for a new tool, I suggest you check out the BNA State Tax Analyzer by Bloomberg BNA.

The BNA State Tax Analyzer is the industry first and only multi-state, multi-year, multi-scenario state tax analysis tool for corporate income tax. It is a cloud-based solution that delivers a full-audit trail, permissions control, and automatic tax-law updates. In fact, I collaborated (and continue to collaborate) with Bloomberg BNA’s software products group to ensure that state tax law (back to 2000) and recent legislative changes are integrated into the product.   

Some of the features include:

• Out-of-the-box calculations, with built-in tax rules and rates for all states that have a corporate income tax, plus the District of Columbia
• Familiar grid approach fits into your current work style
• Audit trail shows who did what when, giving you the SOX controls you need
• Permissions control protects your work
• Customized computations allow you to handle special industry calculations
• Side-by-side comparisons let you see the difference between two scenarios or total across multiple scenarios
• Flexible reporting basis allows you to switch between combined/unitary, consolidated, and separate entity reporting as needed

With its comprehensive set of calculations and audit trail capabilities, BNA State Tax Analyzer can complement or replace risky, time-consuming spreadsheets – saving tax departments hundreds of hours of time and effort every year.

• Take complexity and risk out of corporate state tax calculations
• Gain greater insight with reserve planning for ASC 740 analysis
• Ensure accuracy of state tax returns
• Accelerate tax audits
• Demonstrate compliance with thorough documentation

To learn more, visit here.     

states change interpretation without any change in law?

Throughout my career I have faced several instances where states have made audit assessments or taken positions under audit that contradict the position the state has taken in the past when it has audited the company.  This change in position by the state has occurred even when there has been NO CHANGE in the state's statutes, rulings and court cases since the last audit.

Should the state be able to change their position without any change in authority?  In most cases I would say no.  Unfortunately, when you challenge the position within the audit, you may not get anywhere.  You may have to go to appeals or even court to resolve.  My experience is that resolution is highly likely at the appeals level (this obviously depends on the facts of each case).

With that said, getting back to my original question, should a state be able to change its position without any change in authority?  Allowing states to do so causes a taxpayer to incur time and money to challenge the change in position, when there is no reasonable basis for the change.  

Why would a state make an assessment when there is no change or basis for the assessment?  Well, the answer may be that the state has changed its policy or interpretation of a statute or regulation.  The state may believe that this change in interpretation is enough.  It may or may not be, depending on the facts of the case.

Overall, if you run into this situation don't just accept it.  Question it.  Challenge it.  Just remember, you may have to go to appeals to resolve the matter.  

DISCLAIMER:  Each case is different and states may have justification for their change in position.  This is a reminder to not just accept the change, but to seek to clearly understand the state's position so you can determine if you should challenge it.